E12-23. Time- Adjusted Cost-VolumePronAnany Honeydukes Treat Shop is considering
ID: 2575457 • Letter: E
Question
E12-23. Time- Adjusted Cost-VolumePronAnany Honeydukes Treat Shop is considering the desirability of producing a new chocolate candy called Pleasure Bombs. Before purchasing the new equipment required to manufacture Pleasure Bombs, Neville Long, the shop's proprietor performed the following analysis: .$2.18 Variable manufacturing and selling costs......... $0.45 Annual fixed costs Depreciation (straight-ine for 4 years)....$21750 Other (all cash) Annual break-evi sales volume $67,500 $0.45 150,000 units Because the expected annual sales volume is 160,000 units, Long decided to undertake the produc- tion of Pleasure Bombs. This required an immediate investment of $87.000 in equipment that has life of four years and no salvage value. After four years, the production of Pleasure Bombs will be discontinued. Required a. Evaluate the analysis performed by Long. b. If Honeydukes Treat Shop has a time value of money of 8 percent, should it make the investment with projected annual sales of 160,000 units? c. Considering the time value of money, what annual unit sales volume is required to break even?Explanation / Answer
a)Since the annual break even point is 150000 units ,Production of 160000 units will result in annual profit of 4500 [(160000*.45)-67500]= [72000-67500].
so production of pleasure bombs should be undertaken.
b)Annual cash flow : [(160000*.45)-45000] =27000 [depreciation is a non cash expense ]
Present value of annual cash flow= PVA8%,4*Annual cash flow
= 3.31213* 27000
= $ 89427.51
Net present value = Present value -initial cost
= 89427.51-87000
= $ 2427.51
since NPV is positive ,production should be undertaken
c)At 8% financial breakeven ,NPV is 0 so present value of cash flow will equal initial cost of 87000
Number of units to break even "X" .so annual cash flow = [(x*.45)-45000]
= .45x -45000
Present value =[PVA8%,4*Annual cash flow]
87000 = 3.31213*[.45x-45000]
= 1.49046- 149045.85
87000+149045.85 =1.49046 x
x = 236045.85/1.49046
= 158371 units approx
number of units = 158371
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